The Art of Apple's Price Strategy: Understanding Why iPhones Never Go On Sale

As someone who has shopped for a smartphone before, you may have noticed that sales like those from Samsung or Google are quite common. However, when it comes to the iPhone, this is nearly impossible. Apple never offers sales on their smartphones, even though they are some of the priciest in the industry. Instead, Apple encourages customers to trade-in their old iPhone for a discount or sign up for the iPhone Installments program to make the full payment over a longer period of time.

So, why does Apple refuse to run iPhone sales? The answer lies in understanding Apple's business model, which relies heavily on hardware sales. This is different from companies like Google, which makes 74% of their revenue from ads, capturing user data and selling it to advertisers. To have user data to sell, they need users. That's why many of their software products are free. The money they make from selling their software to customers pales in comparison to what they make off user data. Hardware sales make up only 12% of Google's earnings, which is included in their miscellaneous category that also includes digital sales from the Google Play Store.

In contrast, Apple makes 78% of its revenue from hardware. Although having more customers would be beneficial to their services business, since it means more potential iCloud, Apple Arcade, and Apple News Plus subscribers, Apple's primary focus has always been and continues to be on profit from hardware. Profit is the key word here, not revenue. Selling an iPhone 12 for $500 would give Apple $500 in revenue, but they wouldn't make any profit since it costs around $500 to make the phone.

Apple's strategy is to control the price of their products, rather than letting them fluctuate based on market demand. This allows them to ensure that they make a significant profit margin on each device sold. By doing so, Apple can invest in research and development, marketing, and other areas of the business that drive growth and innovation.

One of the key factors that has contributed to Apple's success is their ability to create a loyal customer base. When Steve Jobs introduced the iPhone, he clearly outlined Apple's sales goal: to capture 1% of the mobile phone market in 2008. This was a tiny number, something they had already exceeded with the Mac. However, because the phone market was so big, a 1% share amounted to about 10 million units sold and around five billion dollars in revenue for Apple.

However, what actually happened was far better than expected. The iPhone didn't experience the same market-share ceiling as the Mac, which Apple may have initially anticipated. Over the years, the iPhone went on to dominate the US smartphone market with a 60% share, dwarfing second-place Samsung with 24%. This success resulted in an unprecedented amount of revenue for Apple.

So, how did Apple ensure their revenue grows year over year? With the Mac, they never even approached market saturation of their product, so their goal was always to attract as many PC switchers as possible and capture just a little more market share every year. However, the iPhone had been far and away the market leader in the US since its release, making it impossible for Apple to raise prices without alienating existing customers.

To address this challenge, Apple raised prices on their iPhones. The price hikes began in 2017 with the iPhone 8, 8 Plus, and X. For the first time ever, Apple was selling an iPhone for $1,000. If you wanted the larger capacity model, the price was $1,149. This raised the iPhone's average selling price from $606 in 2017 to $724 in 2018, boosting Apple's annual revenue by 17%. More importantly, the 32% increase in profit margin made it clear that raising prices was a viable strategy for driving growth.

However, this raises an interesting question: would lowering the iPhone's price be counterproductive? The answer is yes. If Apple were to lower the price of their iPhones, they would likely lose billions of dollars in profits overnight. This would also mean that Tim Cook, Apple's CEO, would probably face significant pressure from investors and shareholders, potentially leading to his termination.

In conclusion, Apple's strategy of controlling the price of their products is a deliberate choice, driven by a desire to maximize profit margins and drive growth through innovation and customer loyalty. By doing so, Apple has been able to maintain a loyal customer base and drive unprecedented revenue growth. While lowering prices may seem like an attractive option in certain circumstances, it would likely be detrimental to Apple's long-term success.

"WEBVTTKind: captionsLanguage: enIf you’ve ever shopped for a smartphonebefore, you’ve probably seen sales likethis one from Samsung.Or this one from Google.Android smartphones go on sale fairly regularly,so it’s pretty easy to purchase one forless than retail price.But when it comes to the iPhone, that’snearly impossible.Apple never offers sales on their smartphones,even though they’re some of the priciestin the industry.Instead, Apple encourages customers to trade-intheir old iPhone for a discount, or sign upfor the iPhone Installments program to makethe full payment over a longer period of time.So why is Apple so averse to running iPhonesales?They’re already making so much money, andthey could sell a lot more units if they loweredthe price, right?Well, that’s exactly what I’m going toexplain in this video.This is Greg with Apple Explained.Today’s topic came in a resounding firstplace in the last voting poll.If you didn’t get to participate, make sureyou’re subscribed and voting polls likethis one will begin appearing in your mobileactivity feed.Alright so why doesn’t Apple just lowerthe iPhone’s price a little bit to get morecustomers?Well, in order to figure out why, we haveto understand their business model.Which relies heavily on hardware sales.Consider Google, they make 74% of their revenuefrom ads.Which involves capturing user data and sellingit to advertisers.In order to have user data to sell, they needusers.That’s why so many of their software productsare free.The money they’d make from selling theirsoftware to customers pales in comparisonto what they make off user data.Hardware sales make up such a tiny percentageof Google’s earnings that they includedit in their miscellaneous category that notonly includes their Pixel smartphone and Nesthome products, but also digital sales fromtheir google play store.And all of those things combine, only amountto 12% of total revenue.Compare that to Apple, who makes 78% of theirrevenue from hardware.And although having more customers would bebeneficial to their services business, sincethat means more potential iCloud, Apple Arcade,and Apple News Plus subscribers, Apple’sprimary focus has always been and continuesto be on profit from hardware.And profit is the key word, not revenue.Selling an iPhone 12 for $500 would give Apple$500 in revenue, but they wouldn’t makeany profit since it costs about $500 to makethe product.That’s why emphasis on profit margin isso important.And it’s also why Apple will never sella television set, since the margins in thatindustry are razor thin.I’ll actually be explaining more about thatin an upcoming video so be sure you’re subscribedto catch it.But understanding profit margin is crucialto recognizing why Apple never runs sales.Margins in the tech market are known to beslim compared to other businesses like clothing.Where manufactures markup their product by100 to 250% or more.That’s why stores like H&M can run salesall year round and still make huge profits.But technology is not only more competitive,it’s also more costly.Bringing something like a smartphone to marketnot only requires investment in research anddevelopment for the hardware, but also insoftware development for the operating system.And the problem is these costs are so high,that tech companies can’t charge 250% markupssince it would make their product prohibitivelyexpensive.So they typically use other business modelsto make money.Like the example with Google I mentioned earlier,or even a company like Amazon.Who sells their their Kindle Fire tablet ata loss, since their business model isn’tbased on hardware sales, but rather mediasales like ebooks, which 80% of Kindle usershave purchased.But Apple made the decision a long time agoto avoid this business model.Since it results in a race to the bottom thatdoesn’t benefit the company nor the user.Amazon isn’t trying to make the best tabletpossible, they’re simply trying to makeit as cheap as possible.So they can get their high-margin ebooks intoas many hands as possible.And while there’ll always be a market forcheap electronics, that’s not the demographicApple targets.Instead, they go the opposite direction.Hoping, that by offering a superior user experience,customers will pay a premium for their product.It worked with the Mac, which only made upabout 7% of all computers sold in 2019.But accounted for almost 14% of the entiremarket’s revenue.That’s because Apple’s profit margin ismuch wider than the competition.Companies like Dell try to price low and sella high volume of computers.While Apple is happy to sell a lot less, aslong as their margins remain high.And that philosophy applies to every productthey make.That’s why, when the iPhone debuted in 2007,it was the most expensive phone on the market.With many believing the price was out of reachfor the average smartphone customer.But Apple didn’t mind if only a fractionof customers bought their product.In fact, when Steve Jobs introduced iPhone,he clearly outlined Apple’s sales goal.Hoping to capture 1% of the mobile phone marketin 2008.That was a tiny number, something they’dalready exceeded with the Mac.But because the phone market was so big, a1% share amounted to about 10 million unitssold, and about five billion in revenue forApple.But what actually happened was far better.The iPhone didn’t experience the same marketshareceiling as the Mac, which Apple may’ve expectedto be the case.Over the years, the iPhone went on to dominatethe US smartphone market with a 60% share.Dwarfing second-place Samsung with 24%.And that success resulted in an unprecedentedamount of revenue for Apple.But all that success came with a problem.How would Apple ensure their revenue growsyear over year?With the Mac, they never even approached marketsaturation of their product, so their goalwas always to attract as many PC switchersas possible and capture just a little moremarket share every year.But the iPhone had been far and away the marketleader in the US since its release.So the growth strategy of attracting new customersdidn’t make sense, since Apple already hadthe majority.So in order to make more money, they wereforced to raise prices.That way, they wouldn’t have to sell moreunits to make more profit.And over the last five years, we’ve seenApple push the limits of how much customersare willing to pay.The iPhone price hikes began in 2017 withthe iPhone 8, 8 Plus, and X.For the first time ever, Apple was sellingan iPhone for $1,000.If you wanted the larger capacity model, theprice was $1,149.This raised the iPhones average selling pricefrom $606 in 2017 to $724 in 2018.Boosting Apple’s annual revenue 17%.But more importantly, was the 32% increasein profit.Had Apple not raised prices, they would’vehad to increase their customer base by atleast 32% to achieve the same profit boost.But that big of a jump is not only virtuallyimpossible, but also completely irrelevant.Apple actually gained more customers whenthey raised the iPhone’s price to $1,000.So lowering it back down would be completelycounterproductive.Since there’s no way they’d suddenly achievea 40 or 50% boost in sales that they’d need,just to match their profits from the previousyear.And that’s exactly why Apple will neverlower the iPhone’s price to try and sellmore units.If they did, they would literally lose billionsin profits overnight.And Tim Cook would probably be fired as CEO,all in an attempt to sell a few more units.Alright guys so that is why iPhones nevergo on sale.If you want to find out why Apple will nevermake a television, make sure you’re subscribed,and I’ll see you in the next video.\n"